United States District Court, D. Idaho
TWIN FALLS NSC, LLC, a Tennessee limited liability company, Plaintiff/Counter-defendant,
v.
SOUTHERN IDAHO AMBULATORY SURGERY CENTER, LLC, an Idaho limited liability company, Defendant/Counter-claimant.
MEMORANDUM DECISION AND ORDER
David
C. Nye, Chief U.S. District Court Judge
I.
INTRODUCTION
Plaintiff/Counter-defendant
Twin Falls NSC, LLC (“Twin Falls”) filed a
Complaint and Application to confirm a final arbitration
award (Dkt. 1) issued in an arbitration with Defendant
Southern Idaho Ambulatory Surgery Center, LLC
(“Sawtooth”). The arbitration award became final
on January 7, 2019. Sawtooth filed a Counter-Petition to
vacate the arbitration award (Dkt. 8), alleging the
arbitrator refused to provide Sawtooth with access to
critical evidence, refused to consider dispositive evidence
submitted by Sawtooth during the arbitration proceedings, and
committed manifest disregard of the law. In the alternative,
Sawtooth suggests the Court must remand to the arbitrator for
clarification and modification because the arbitration award
is incomplete, ambiguous and contradictory. Twin Falls
thereafter filed a Motion to Confirm the arbitration award
(Dkt. 12) and a Motion to Dismiss Sawtooth’s
Counter-Petition (Dkt. 13). Sawtooth responded with its own
Motion to Vacate/Modify the arbitration award (Dkt. 22). The
Court held oral argument on the motions on July 18, 2019.
Because
Sawtooth fails to satisfy the extremely narrow circumstances
under which a final arbitration award can be vacated or
remanded under the Federal Arbitration Act, 9 U.S.C.
§§ 10 and 11 (“FAA”), the Court GRANTS
Twin Falls’ Motion to Confirm Arbitration Award (Dkt.
12), DENIES Sawtooth’s Motion to Vacate and/or Modify
Arbitration Award (Dkt. 22), and MOOTS Twin Falls’
Motion to Dismiss. (Dkt. 13).
II.
FACTS
On June
27, 2018, Sawtooth initiated an arbitration proceeding with
the American Arbitration Association (“AAA”)
against Twin Falls by filing an arbitration demand. Sawtooth
asserted claims for breach of contract, breach of fiduciary
duty, declaratory judgment, intentional interference with
prospective economic advantage, negligent interference with
prospective economic advantage, negligent misrepresentation,
unjust enrichment, fraud, failure to turn over corporate
records, and an accounting. The parties were required to
arbitrate their disputes pursuant to the “Second
Amended and Restated Operating Agreement of Southern Idaho
Ambulatory Surgery Center” (hereinafter
“Operating Agreement”). Dkt. 1, Ex. 4. On July 3,
2018, Twin Falls filed its Answer, along with a counterclaim
for breach of contract against Sawtooth.
On July
17, 2018, the AAA appointed former Arizona Superior Court
Judge Rebecca A. Albrecht as arbitrator in the matter
(hereinafter the “Arbitrator”). Pursuant to the
expedited schedule provided in the Operating Agreement, and
after a prehearing conference with the Arbitrator on June 20,
2018, the parties agreed to submit dispositive motions by
August 15, 2018. Dkt. 1, Ex. 7. On August 28, 2018, the
Arbitrator granted summary judgment in favor of Twin Falls on
Sawtooth’s claims for declaratory judgment, intentional
interference with prospective economic advantage, negligent
interference with prospective economic advantage, negligent
misrepresentation, unjust enrichment and fraud.
An
arbitration hearing was held on September 7-8, 2018, in Twin
Falls, Idaho. On September 7, 2018, after the close of
Sawtooth’s proof at the hearing, the Arbitrator granted
a directed verdict in favor of Twin Falls on Sawtooth’s
claims for breach of fiduciary duty, the demand for turnover
of corporate records, and the demand for an accounting.
Following the hearing, both parties submitted post-hearing
briefs on October 17, 2018. On November 9, 2018, the
Arbitrator entered an Interim Award, finding in favor of Twin
Falls on its counterclaim for breach of contract. The
Arbitrator held that Sawtooth was liable to Twin Falls in the
amount of $236, 830 for breach of contract and awarded
judgment in favor of Twin Falls on Sawtooth’s remaining
claims. Pursuant to the Operating Agreement, the Arbitrator
also awarded Twin Falls its attorneys’ fees and costs.
Dkt. 1, Ex. 4, at § 21.11.
Following
submission of Twin Falls’ fees and costs and
Sawtooth’s objection thereto, the Arbitrator confirmed
the Interim Award and entered a Final Award and Award of
Attorneys’ Fees and Costs on January 7, 2019
(“Final Award”). In addition to $236, 830 in
damages for Sawtooth’s breach of contract, the Final
Award granted Twin Falls their total requested
attorneys’ fees and costs in the amount of $976,
207.74, as well as $17, 008.49 for Twin Falls’ share of
the AAA expenses. The Interim Award and Final Award are
referred to collectively hereinafter as the
“Arbitration Award.” Pursuant to 9 U.S.C. §
9 and Idaho Code section 7-911, Twin Falls filed the instant
action to confirm the Arbitration Award on January 9, 2019.
Although
the aforementioned facts are those relevant to the instant
suit, a brief summary of the underlying dispute provides
necessary context for Sawtooth’s attempt to vacate the
Arbitration Award. Sawtooth is an ambulatory surgery center
founded in 1998 by a small group of surgeons in Twin Falls,
Idaho. As Sawtooth grew, the prospect of large-scale funding
and national resources motivated a partnership with a company
called National Surgical Corporation (“NSC”). NSC
acquired a fifty-one percent (51%) ownership interest in
Sawtooth, assumed the position of Managing Member of
Sawtooth, and held its interest through special purpose
entity Twin Falls. The Operating Agreement set out the rights
and duties of the Managing Member and the non-Managing
Members of Sawtooth.
Between
2007 and 2011, Sawtooth flourished under the management of
NSC. However, in late 2011, NSC sold its interest in Twin
Falls to AmSurg Holdings (“AmSurg”). Twin Falls,
under its new ownership, served as the Managing Member of
Sawtooth between September 1, 2011, and December 26, 2017.
Twin Falls succeeded to broad managerial powers and control
of Sawtooth under the Operating Agreement, which remained
unaltered during the AmSurg acquisition. In exchange, Twin
Falls received a monthly “Management Fee” equal
to seven-percent (7%) of Sawtooth’s net
receipts.[1]
Sawtooth
became dissatisfied with Twin Falls’ management almost
immediately.
Over
the next six years, the relationship between the parties
continued to deteriorate. Although it recounts a number of
Twin Falls’ purported failures, Sawtooth was
particularly frustrated by Twin Falls’ management of
Sawtooth’s ophthalmology practice group
(“Ophthalmology Group”), concerned about Twin
Falls’ lack of strategic planning and recruitment, and
disenfranchised by Twin Falls’ purported acts of
interference with Sawtooth’s physicians and
revenue-generating activities by competitor St. Luke’s
Medical Group, Ltd. (“St. Luke’s”). Dkt. 8,
¶ 22.
Beginning
in 2012, Sawtooth’s Ophthalmology Group began
criticizing the compensation paid to Twin Falls as
disproportionate to the value Twin Falls contributed to
Sawtooth’s business. In 2013, the Ophthalmology Group
expressed a desire to potentially withdraw from
Sawtooth’s membership and move their surgical caseload
to another surgical center. Twin Falls negotiated with the
Ophthalmology Group for more than a year. The Ophthalmology
Group’s main concerns were its percentage of ownership,
the management fee paid to Twin Falls, and the long-term
viability of Sawtooth given competition from St.
Luke’s. Despite lengthy discussions, the Ophthalmology
Group ultimately decided to leave Sawtooth, and subsequently
sold their membership units to remaining non-Managing members
of Sawtooth.
Over
the following two years, the Ophthalmology Group reduced its
caseload but continued to perform procedures at Sawtooth
until it had satisfied its noncompetition obligations. Once
such obligations were satisfied, the Ophthalmology Group cut
all ties with Sawtooth. Sawtooth suggests Twin Falls made no
efforts to recruit surgeons to replace the income it knew
would be lost at the end of the noncompetition period and
instead chose to “reap the Ophthalmology Group’s
revenue during the period they were bound by the
non-competition obligation.” Dkt. 8, ¶ 29. As a
result, Sawtooth suggests Twin Falls “forfeited rights
against physicians whose membership obligations would have
yielded approximately $15, 000, 000 in projected gross
earnings.” Id. at 30.
Sawtooth
also claims Twin Falls did nothing to prevent or remedy
interference with its operations by St. Luke’s,
including the health system’s purported coercion of
Sawtooth’s non-Managing Members and non-Member
physicians. In particular, Sawtooth claims one of
Sawtooth’s founding Members, Dr. Blake Johnson, moved
his entire surgical practice to St. Luke’s new surgery
center in late 2016. Sawtooth alleges Twin Falls failed to
take legally required action to divest Dr. Johnson of his
membership interest in Sawtooth, failed to enforce Dr.
Johnson’s noncompetition obligations, and failed to
take action to stop member compensation from being paid to
Dr. Johnson.
After
“intense discussions” between Sawtooth’s
non-Managing Members and Twin Falls regarding the future of
the surgery center, Twin Falls ultimately withdrew as
Managing Member on December 26, 2017. Dkt. 8, ¶ 41. The
Operating Agreement required that if “the Non-Managing
Members elect timely to reconstitute and continue the
Company” following the withdrawal of the Managing
Member, “the Company shall purchase the Units of the
Managing Member for cash[.]” Dkt. 1, Ex. 4, at §
16.2. After Twin Falls withdrew, Sawtooth continued the
company and elected member Dr. Peter Doble (“Dr.
Doble”) as its Managing Member. Twin Falls’
breach of contract counterclaim was for Sawtooth’s
failure to buy Twin Falls’ units following Twin
Falls’ withdrawal. The parties stipulated at the
arbitration hearing that damages related to Sawtooth’s
failure to pay Twin Falls for its ownership interest after
the withdrawal amounted to $236, 830.00. The Arbitrator found
in favor of Twin Falls on its breach of contract counterclaim
and awarded Twin Falls the aforementioned amount following
the arbitration.
III.
LEGAL STANDARD
Under 9
U.S.C. § 10 of the Federal Arbitration Act
(“FAA”), a United States district court may
vacate an arbitration award “only in very unusual
circumstances.” First Options of Chicago,
Inc. v. Kaplan, 514 U.S. 938, 942 (1995). Limited
judicial review of arbitration awards “maintain[s]
arbitration’s essential virtue of resolving disputes
straightaway.” Hall Street Assoc., LLC v. Mattel,
Inc., 552 U.S. 576, 588 (2008). If parties could take
“full-bore legal and evidentiary appeals, ”
arbitration would become “merely a prelude to a more
cumbersome and time-consuming judicial review process.”
Id. (internal quotation marks and citations
omitted). The party seeking to vacate the arbitration award
thus bears the burden for establishing grounds to do so.
U.S. Life Ins. Co. v. Superior Nat’l Ins. Co.,
591 F.3d 1167, 1173 (9th Cir. 2010).
Pursuant
to 9 U.S.C. § 10(a), a court may vacate an arbitration
award if: (1) the award was procured by corruption, fraud or
undue means; (2) there was evident partiality or corruption
in the arbitrators; (3) the arbitrators were guilty of
misconduct in refusing to postpone the hearing, refusing to
hear evidence pertinent and material to the controversy, or
any other misbehavior by which the rights of a party were
prejudiced; or (4) where the arbitrators exceed their powers,
or so imperfectly executed them that “a mutual, final,
and definite award upon the subject matter submitted was not
made.” 9 U.S.C. § 10(a).
The
Court’s responsibility upon review of an arbitration
award is to ensure that the FAA’s due process
protections were afforded. U.S. Life Ins. Co, 591
F.3d at 1173. The Court is not to impose federal procedural
and evidentiary requirements upon the arbitration hearing.
Id. at 1172. Nor may the Court “reconsider the
merits of [a party’s] substantive legal
arguments.” Sandru v. TD Ameritrade, Inc.,
2015 WL 5611571, at *3 (D. Idaho 2015) (citing Biller v.
Toyota Motor Corp., 668 F.3d 655, 664 (9th Cir. 2012)).
Confirmation is required even in the face of “erroneous
findings of fact or misinterpretations of law.” Am.
Postal Workers Union, AFL-CIO v. United States Postal
Serv., 682 F.2d 1280, 1285 (9th Cir. 1982). As such, the
scope of review is “both limited and highly
deferential.” PowerAgent, Inc. v. Elec. Data Sys.
Co., 358 F.3d 1187, 1193 (9th Cir. 2004).
If
vacatur is not warranted, section 11 of the FAA allows a
court to modify or correct an award: where there was an
evident material miscalculation of figures or an evident
material mistake in the description of any person, thing, or
property referred to in the award; where the arbitrators have
awarded upon a matter not submitted to them, unless it is a
matter not affecting the merits of the decision upon the
matter submitted; or where the award is imperfect in matter
of form not affecting the merits of the controversy. 9 U.S.C.
§ 11. Like § 10, erroneous findings of fact or
misinterpretations of the law are not grounds for
modification or correction of an award under § 11.
San Martine Compania De Navegacion, S.A. v. Saguenay
Terminals Ltd., 293 F.2d 796, 800 (9th Cir. 1961).
IV.
ANALYSIS
A.
Vacatur Pursuant to 9 U.S.C. § 10
Sawtooth
seeks to vacate the Arbitration Award because the Arbitrator
committed misconduct and because the Arbitration Award
“is so fundamentally flawed in its manifest disregard
of the law that it cannot be construed as final, mutual and
definite.” Dkt. 22-1, at 7-8.
1.
Misconduct by the Arbitrator
The FAA
permits vacatur where “the arbitrators were guilty of
misconduct in refusing to postpone the hearing, upon
sufficient cause shown, or in refusing to hear evidence
pertinent and material to the controversy; or any other
misbehavior by which the rights of any party have been
prejudiced.” 9 U.S.C. § 10(a)(3). Sawtooth
suggests the Arbitrator committed misconduct by denying its
motions to compel, failing to postpone or extend the hearing,
excluding testimony from Sawtooth’s non-retained
experts, and disregarding Sawtooth’s evidence.
a.
Denial of Sawtooth’s Motions to Compel
Sawtooth
first suggests vacatur is appropriate because the Arbitrator
improperly restricted Sawtooth’s access to essential
discovery by denying Sawtooth’s Motion to Compel Twin
Falls to produce supplemental responses to specific
interrogatories and requests for production of documents.
Dkt. 22-1, at 7; Dkt. 8, at ¶¶ 84-88. Sawtooth also
challenges the Arbitrator’s denial of Sawtooth’s
Motion to Compel further deposition testimony from Justin
Page, Twin Falls’ Federal Rule of Civil Procedure
30(b)(6) designee. Dkt. 8, at ¶¶ 89-95.
Unless
a discovery mandate is found in a statute, contract
provision, or the adopted rules, a party to arbitration has
no legal right to prehearing discovery. Burton v.
Bush, 614 F.2d 389, 390 (4th Cir. 1980). Here, the
Operating Agreement allowed for limited discovery, including
a brief discovery period concluding 30 days after filing of
the demand for arbitration, no more than 20 hours of
depositions, production of responsive documents, and
identification of individuals with knowledge of the dispute.
Dkt. 1, Ex. 4, at § 21.9. While the parties engaged in
such discovery, Sawtooth faults the Arbitrator for failing to
compel supplemental discovery when Twin Falls’
discovery responses and 30(b)(6) deponent purportedly fell
short. Dkt. 8, ¶¶ 84-95.
A
denial of discovery is not a basis for vacatur under the FAA.
Hyatt Franchising, LLC v. Shen Zhen New World I,
LLC, 876 F.3d 900, 902 (7th Cir. 2017); Bain Cotton
Co. v. Chesnutt Cotton Co., 531 Fed.Appx. 500, 501 (5th
Cir. 2013) (“Regardless [of] whether the district
court. . . might disagree with the arbitrator[’s]
handling of [a party’s] discovery requests, that
handling does not rise to the level required for vacating
under any of the FAA’s narrow and exclusive
grounds.”). Although Sawtooth alleges the
Arbitrator’s discovery rulings warrant vacatur under 9
U.S.C. § 10(a)(3) because a judge may set aside an
arbitrator’s award where the arbitrator “refuses
to hear evidence pertinent and material to the controversy,
” the statutory phrase “refusing to hear
evidence” concerns the conduct of the hearing, not the
conduct of discovery. Hyatt, 876 F.3d at
901. Notably, “avoiding the expense of
discovery under the Federal Rules of Civil Procedure and
their state-law equivalents is among the principal reasons
why people agree to arbitrate.” Id. That Twin
Falls’ attorneys’ fees in the arbitration
proceeding approached $1 million shows that “plenty of
discovery occurred” and an argument that the Arbitrator
“should have allowed more rings hollow.”
Id.
Further,
to vacate an arbitration award on the ground of arbitrator
misconduct, the misconduct must amount to a denial of
fundamental fairness of the arbitration proceeding. Roche
v. Local 32B-32J Service Employees Intern. Union, 755
F.Supp. 622, 624 (S.D.N.Y. 1991). “In handling evidence
an arbitrator need not follow all the niceties observed by
the federal courts. He need only grant the parties a
fundamentally fair hearing.” Bell Aerospace Co.
Div. of Textron, Inc. v. Local 516, 500 F.2d 921, 923
(2d Cir. 1974). Here the process the Arbitrator employed
ensured due process by permitting the discovery outlined in
the Operating Agreement, allowing each of the parties an
adequate opportunity to present their evidence and arguments
with respect to the Motions to Compel, and entering written
orders denying both motions. Immersion Corp. v. Sony
Comput. Entm’t Am. LLC, 188 F.Supp. 3d 960, 975
(N.D. Cal. 2016). Arbitrators “enjoy ‘wide
discretion to require ...